New Reporting For Securities Sales

Starting in January 2011, brokerage firms must begin tracking the cost basis and holding period of sold securities

. This information will then appear on every Form 1099 along with sale proceeds that is issued for the 2011 tax year.

New continuing education enrolled agents receive will address how to assist taxpayers in obtaining accurate basis information. In many cases, the brokers need informing about the basis of shares in an investor's account. Brokers who hold shares that investors transferred to them are unlikely to know the correct cost basis.

IRS rules relating to the reporting of capital gains and losses cover situations where an investor owns several shares purchased at different times. Unless the specific lot of shares is identified, the oldest shares are treated as the first ones sold. This permits a tax planning process described in EA CPE. That is, by identifying particular shares, an investor is able to use shares with the highest basis in order to create a larger loss (or smaller gain).

In order to follow the rules for selling specific shares, an investor has to identify the shares for his broker at the time of sale. The broker then sends a written confirmation of the identification. New regulations change this process slightly.

Investors selling shares in 2011 have until the settlement date to identify the shares sold. The identification is no longer required on the trade date. Still, investors cannot wait until the end of the year to match sales with purchased lots in a manner that provides optimal tax benefit. As conveyed in an enrolled agent ethics course, taxpayers should advice about such tax avoidance procedures.

In some cases, a brokerage may accept a standing order when shares are sold, such as identifying shares with the highest basis as the sold shares. A broker has the option of accepting standing orders. A complex sale formula is likely to require investor identification upon each sale. Coursework for enrolled agent CPE requirements covers such matters for consultation with investors.

Investors may use any reasonable method for conveying share lot identification to a broker. The investor communication may be oral. Cooperation with a broker is obviously critical to the share identification process. Broker confirmation is required for share identification. The regulations don't require brokers to adopt share identification procedures. Some brokerages have in fact not implemented confirmation systems. This has precluded investors from using share identification.

However, the new regulations make the confirmation process easier for brokers to follow. Brokers may provide confirmation electronically. This includes simple identification on a monthly account statement. This permits broker confirmation from a few keystrokes effecting the automated statement rendering system. Improving share identity in this way is expected to enhance investor usage of specific lot identification as a tax planning technique. This is another area where completion of EA CPE requirements provides useful information to convey benefits for taxpayers to capture.

by: Sawyer Adams

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